BUSI 3405U Lecture Notes - Lecture 6: Interest Rate Risk, Liquidity Premium, Credit Risk
Document Summary
Sold at par: when the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. Sold at discount: the yield to maturity is greater than the coupon rate when the bond price is below its face value. Sold at premium: the yield to maturity is less than the coupon rate when the bond price is above its face value. Console: a bond with no maturity date that does not repay principal but pays fixed coupon payments forever. Yield on a discount basis idb = (f p)/p x 365/(days to maturity) where: idb = yield on a discount basis. F = face value p = purchase price. Interest rate risk: risk that a bond"s price will change because interest rates change. Volatile refers to the percentage change of price. Prices for long-term bonds are more volatile than those for shorter-term bonds. Prices for low-coupon bonds are more volatile than those for high-coupon bonds.
